Regulator Scrutinizes Fannie Accounting

The chief regulator of Fannie Mae said the mortgage giant uses more than 70 flawed accounting systems in its financial reporting division, a unit that was responsible for a $1.1 billion accounting mistake back in October.

In a Feb. 24 letter to Fannie Mae chairman Franklin Raines, the Office of Federal Housing Enterprise Oversight asks the company to correct the problem and submit a remediation plan.

"The lack of a fully automated SFAS 149 accounting process as well as the total number of other end-user computing systems at Fannie Mae raise concern," OFHEO director Armando Falcon writes in the letter. (SFAS is a reference to an accounting rule.)

The agency says "end-user" computing systems carry significant risk of error because they are not totally automated and allow for manual overrides. (End-user systems are akin to manual systems because they are not totally automated.)

Fannie's $1.1 billion accounting error, which did not affect earnings, was the result of what the agency calls a "computational miscalculation contained in a spreadsheet formula."

The error occurred because a Fannie Mae employee made an unapproved change to a formula in an Excel spreadsheet.

A Fannie spokesman said the company is "comfortable" that it will be able to respond to OFHEO's request.

Earlier this month, OFEHO hired Deloitte & Touche LLP to spearhead a year-long forensic audit into the accounting policies and practices of Fannie Mae.

D&T and OFHEO staffers are now working on the audit, which the agency says includes "among other things, accounting policies and internal controls ... with emphasis on identification of any control weaknesses or unusual transactions."

This past fall, Fannie reported that it had made an unintentional accounting error that changed the value of its shareholder equity by $1.1 billion. The White House mentioned the accounting mistake in its new budget in a section that discusses the financial risk of the GSEs.

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